UK fintech company Zilch has said that using its buy now pay later (BNPL) product will affect customer credit scores, in a move that pre-empts stricter government regulation of the sector.
As revealed by The Telegraph, the BNPL provider – a purchase method that splits repayments into instalments – will report customer transactions to credit reference agencies (CRAs).
Tighter regulation for the BNPL industry has been in the works since June last year when the government first unveiled plans to keep the booming sector in check.
While there has been a considerable wait to see the new rules, it is understood that they will see BNPL purchases treated as loans, including affecting credit scores.
Klarna, one of the largest providers of BNPL payments, announced it would report purchases in the UK to CRAs back in May. The company then urged the British government to properly implement regulatory reforms at a faster pace.
Zilch, which closed a $160m (£131m) Series C funding round last year, is set to follow its Swedish rival in this policy.
The decision will mean that failure to keep up with BNPL payments will be treated similarly to a failure to repay loans by credit agencies. Zilch does not charge late fees.
Speaking to The Telegraph, Zilch boss Philip Belamant put a positive spin on the policy, highlighting that it will provide an extra chance for customers to improve their credit scores.
“For the first time in the UK, customers can now build their credit scores without relying on revolving high-interest rate bearing products,” Belamant said.
“This pioneering agreement will help kickstart the evolution of the traditional UK consumer credit lending ecosystem, enabling people in Britain who responsibly borrow credit through BNPL and repay on time, to both manage cash flow and improve – and in some cases, build – their personal credit records.”
A Zilch spokesperson told UKTN that it welcomes tighter controls on areas such ‘credit stacking’, where consumers use credit cards to make BNPL repayments. Zilch added that it “has never, and never will, allow” this activity.
Zilch changes stance on credit scores
The decision is a clear change in strategy for Zilch. In September last year, Belamant told UKTN that reporting BNPL purchases to credit agencies was flawed. He explained that CRAs were not equipped to process the data of fixed sum instalment purchases, and would instead make consumers appear as “credit hungry”.
A Zilch spokesperson told UKTN that the company has been sharing UK customer activity with “prime CRAs’ consumer credit files for approximately nine months” to ensure that credit rating agencies can “effectively” handle BNPL data.
The spokesperson added: “The outcome of our work with the major three CRAs is that they have created a new reporting category for companies with products like Zilch, which experience high customer usage frequency as a direct result of the product’s ability to be used anywhere, and which provide BNPL-style credit but are direct to consumer providers (i.e. the customer is the person, not the merchant), to now show on their credit file.”
The Financial Conduct Authority (FCA) has repeatedly stressed the importance of introducing regulation amid rising demand for BNPL services.
A recent survey from the Centre for Financial Capability found that the demand for BNPL products had risen among all age groups for 2023.